European Financial Management 2020 Archive

January 2020, VOL 26:1 March 2020, VOL 26:2 June 2020, VOL 26:3 September 2020, VOL 26:4 November 2020, VOL 26:5

European Financial Management, VOL 26:1, January 2020

Limits‐to‐arbitrage, investment frictions, and the investment effect: New evidence

F. Y. Eric C. Lam, Ya Li, Wikrom Prombutr, K. C. John Wei

This study comprehensively reexamines the debate over behavioral and rational explanations for the investment effect in an updated sample. We closely follow the previous literature and provide several differences. Our tests include five prominent measures of corporate investment and corporate profitability in q‐theory and recent investment‐based asset pricing models. Both classical and Bayesian inferences show that limits‐to‐arbitrage tend to be supported by more evidence than investment frictions for all investment measures. When idiosyncratic volatility and cash flow volatility are used in measuring investment frictions, the inference is more favorable for the rational explanation.

Keywords: Limits-to-arbitrage; Investment frictions; q-theory; Investment, Stock returns

JEL Classification: G14, G31, G32, M41, M42

Director networks, turnover, and appointments

Luc Renneboog, Yang Zhao

This paper analyzes the labor market (turnover and appointments) of executive and non-executive directors by means of social network methodology. We find that directors with strong networks are able to obtain labor market information that enables them to leave their firm more easily for better opportunities. Networks also mitigate information asymmetry problems of external director appointments. Furthermore, the strong impact of indirect connections is in line with the ‘strength of the weak ties’ theory. The fact that direct connections are less important signifies that the connections to people that are close and local are likely to convey redundant information, whereas connections to distant individuals are more efficient in terms of information acquisition and labor market performance improvement.

Keywords: Corporate Governance; Director Networks; Director Turnover; Director

JEL Classification: G34, J4, L14

Corporate social responsibility: An umbrella or a puddle on a rainy day? Evidence surrounding corporate financial misconduct

John Bae, Wonik Choi, Jongha Lim

We examine the way a fraudulent firm's pre‐ and post‐misconduct corporate social responsibility engagement is associated with its stock performance to investigate the reputational role of corporate social responsibility (CSR). In the short term, firms with good CSR performance suffer smaller market penalties upon the revelation of financial wrongdoing, supporting the buffer effect, as opposed to the backfire effect, of a good social image. We also find that the misbehaving firms’ post‐misconduct CSR efforts are negatively associated with delisting probabilities, and positively with stock returns. These findings support the argument that increasing post‐crisis CSR engagement can be an effective remedy for a damaged reputation

Keywords: TBA

JEL Classification: TBA

NAV inflation and impact on performance in China

Mark Shackleton, Jiali Yan, Yaqiong Yao

Our study is among the first to examine the net asset value (NAV) inflation practices of fund managers in China, finding that equity funds bolster their portfolios at quarter‐end and especially year‐end. In support of the NAV inflation hypothesis in China, we further document the following: (1) NAV inflation is more profound for the worst‐performing fund managers; and (2) the stocks in which fund managers hold larger stakes exhibit a more marked pattern of price inflation around quarter‐ and year‐ends than do other stocks. We also find that closed‐end funds in China engage in NAV inflation at quarter‐ and year‐ends.


JEL Classification: TBA

Bank liquidity, macroeconomic risk, and bank risk: Evidence from the Financial Services Modernization Act

I‐Ju Chen, Yu‐Yi Lee, Yong‐Chin Liu

We investigate the empirical relationship between macroeconomic risk, bank liquidity, and bank risk surrounding the 1999 Financial Services Modernization Act. We propose that bank risk and liquidity are positively related as macroeconomic risk increases, and that this effect is particularly strong after the Gramm–Leach–Bliley Act (GLBA). We test our hypotheses by collecting data from 1994 to 2006 for banks in the United States. The results show that banks flush with liquid assets in a high macroeconomic risk environment conducted more lending activities following the enactment of the GLBA, leading to higher bank risk. Our study complements the understanding of bank liquidity management.

Keywords: TBA

JEL Classification: TBA

Manager skill and portfolio size with respect to a benchmark

Andrei Bolshakov, Ludwig B. Chincarini

Investment managers often manage a portfolio with respect to a benchmark. Typ- ically, they use a mean-variance optimization framework to maximize the information ratio of their portfolio. We develop an unconventional approach to this question. Given a set of assumptions, we ask what optimal percentage of the benchmark stocks should the portfolio manager select. This optimal portfolio depends on Fisher’s and Walle- nius’s noncentral hypergeometric distribution. We find that the optimal selectivity of a benchmark universe varies from 50% to 80%. These results are provocative, given that many enhanced index portfolio managers select a low percentage of the benchmark universe.

Keywords: Enhanced indexing, information ratio, portfolio management, active man- agement.

JEL Classification: G0, G13

Does trade credit really help relieving financial constraints?

Stefania Cosci, Roberto Guida, Valentina Meliciani

The European Union introduced a directive aimed at reducing trade credit due to its supposedly negative effect on the European economy. This contrasts with the redistribution view arguing that trade credit could facilitate the financing of credit-constrained firms by more liquid suppliers. But does trade credit mainly flow from relatively unconstrained suppliers to more financially constrained buyers? To answer this question, we look at the characteristics of net borrowers with respect to net lenders and then estimate the substitutability between trade and bank debt separately for the two groups of firms. Overall, the results show that, in Italy, efficient redistribution does not tend to prevail in the trade credit market

Keywords: Trade credit; redistribution view; financial constraints; substitutability.

JEL Classification: G32; G21; D82

Second and higher moments of fundamentals: A literature review

Yuecheng Jia, Ivilina Popova, Betty Simkins, Qin Emma Wang

This literature review outlines the recent progress in fundamental second and higher moments research. We survey the moments’ existence, formation, and financial market andmacroeconomic implications. Research shows that time-varying volatility and non-Gaussian shocks exist throughout all measures of fundamentals at both the micro and macro levels.Additionally, the granular network among firms helps explain the origin of fundamental second and higher moments. Empirical evidence shows that the moments have strong predictive power on asset prices and macroeconomic variables. We also highlight several areas wheremore research is needed to better understand the moments.

Keywords:Fundamental second moments, Fundamental higher moments, time-varying volatility, non-Gaussian shocks, granular network

JEL Classification: G12

Uncovering Predictability in the Evolution of the WTI Oil Futures Curve

Fearghal Kearney, Han Lin Shang

Accurately forecasting the price of oil, the world’s most actively traded commodity, is of great importance to both academics and practitioners. We contribute by proposing a functional time series based method to model and forecast oil futures. Our approach boasts a number of theoretical and practical advantages including effectively exploiting underlying process dynamics missed by classical discrete approaches. We evaluate the finite-sample performance against established benchmarks using a model confidence set test. A realistic out-of-sample exercise provides strong support for the adoption of our approach with it residing in the superior set of models in all considered instances.

Keywords: Crude oil, Forecasting, Functional time series, Futures contracts, Futures markets

JEL Classification: G10, G15, C53

European Financial Management, VOL 26:2, March 2020

News sentiment and sovereign credit risk

Lara Cathcart, Nina M. Gotthelf, Matthias Uhl, Yining Shi

We explore the impact of media content on sovereign credit risk. Our measure of media tone is extracted from the Thomson Reuters News Analytics database. As a proxy for sovereign credit risk we consider credit default swap (CDS) spreads, which are decomposed into their risk premium and default risk components. We find that media tone explains and predicts CDS returns and is a mixture of noise and information. Its effect on risk premium induces a temporary change in investors’ appetite for credit risk exposure, whereas its impact on the default component leads to reassessments of the fundamentals of sovereign economies.

Keywords: CDS, sovereign risk, credit risk premium, media tone

JEL Classification: G12; G15.

Do security breaches matter? The shareholder puzzle

Allen Michel, Jacob Oded, Israel Shaked

This article analyzes the effect of computer breaches on publicly traded equities from 2005 to 2017. An event study is performed and breaches analyzed conditioned on whether the breach announcement has been made in the mainstream media or through other channels. We find that in the period prior to the announcement date in the media, the mean abnormal return is negative, reflecting a likely leakage of information. In the period following the announcement date, the mean abnormal return is positive, often more than offsetting the previous declines. The findings have important implications for analysts, portfolio managers, institutional investors, and regulators.


JEL Classification:

Downside beta and the cross section of equity returns: A decade later

Yigit Atilgan, K. Ozgur Demirtas, A. Doruk Gunaydin

This study reexamines the relation between downside beta and equity returns in the U.S. First, we replicate Ang, Chen and Xing (2006) who find a positive relation between downside beta and future equity returns for equal-weighted portfolios of NYSE stocks. We show that this relation doesn’t hold after using value-weighted returns or controlling for various return determinants. We also extend the original sample, add AMEX/NASDAQ stocks or utilize alternative downside beta measures and still find no downside risk premium. We focus on factor analysis results, persistence of downside beta and various subsamples to understand the economic reasons behind the findings.

Keywords:downside beta, downside risk, tail risk, equity returns, asset pricing

JEL Classification: G10, G11, G12

Motivated monitoring by institutional investors and firm investment efficiency

Charles Ward, Chao Yin, Yeqin Zeng

We find that motivated monitoring by institutional investors mitigates firm in- vestment inefficiency, estimated by Richardson’s (2006) approach. This relation is robust when using the annual reconstitution of the Russell indexes as exogenous shocks to institutional ownership during the period 1995–2015 and after classifying institutional ownership by institution type. We also show that closer monitoring mitigates the problem of both over-investing free cash flows and under-investment due to managers’ career concerns. Finally, we document that the effectiveness of the monitoring by institutional investors appears to increase monotonically with respect to the firm’s relative importance in their portfolios.

Keywords:Institutional investors; Investment efficiency; Monitoring attention; Agency problem; Index switch

JEL Classification: G23; G30; G31; M4

Cash holdings in family firms: CEO identity and implications for firm value

Lorenzo Caprio, Alfonso Del Giudice, Andrea Signori

We investigate the cash holdings policy of family firms and examine potential value implications. Family firms hold more cash than other firms, with an average difference of 2.3% of total assets. This result is driven by firms managed by heir CEOs. While the cash holdings policy of first-generation family firms is more sensitive to firm risk, consistent with founders’ increased risk aversion, that of later-generation firms is more sensitive to information asymmetry and agency conflicts. Heir CEOs’ cash policies destroy value, as the marginal value of an additional euro suffers from a 38.3-cent discount, on average, relative to non-family firms.

Keywords:cash holdings, family firms, value of cash, family generation

JEL Classification: G30; G32; G35

Board diversity reforms: Do they matter for EU bank performance?

Francesca Arnaboldi, Barbara Casu, Elena Kalotychou, Anna Sarkisyan

We examine the impact of governance reforms related to board diversity on the performance of European Union banks. Using a difference‐in‐difference approach, we document that reforms increase bank stock returns and their volatility within the first 3 years after their enactment. The type of reform matters, with quotas increasing return volatility. The effectiveness of reforms depends on a country’sinstitutionalenvironment.Theimpactofreforms on return volatility is found to be beneficial in countries moreopentodiversity, withcommonlaw system and with greater economic freedom. Finally, reforms play a bigger role in banks that have ex ante less heterogeneous boards.

Keywords:bank performance, board diversity reforms, corporate governance codes

JEL Classification: G21; G30

When fund management skill is more valuable?

Feng Dong, John A. Doukas

Does fund management skill allow managers to identify mispriced securities more accurately and thereby make better portfolio choices resulting in superior fund performance when noise trading – a natural setting to detect skill – is more prevalent? We find skilled fund managers with superior past performance to generate persistent excess risk‐adjusted returns and experience significant capital inflows, especially in high sentiment times, high stock dispersion, and economic expansion states when price signals are noisier. This pattern persists after we control for lucky bias, using the ‘false discovery rate’ approach, which permits disentangling manager ‘skill’ from ‘luck.’


JEL Classification:

Intra‐industry bankruptcy contagion: Evidence from the pricing of industry recovery rates

Yuanchen Chang, Yi‐Ting Hsieh, Wenchien Liu, Peter Miu

How does bankruptcy contagion propagate among industry peers? We study the debt recovery channel of industry contagion by examining whether the cost of a company’s debt is affected by the observed recovery rates of its bankrupt industry peers. Our results show that lower industry recovery rates are associated with higher loan spreads, but only when the contracts were originated during industry bankruptcy waves. Consistent with the debt recovery channel of industry contagion, we find that the negative effects of industry recovery rates are significantly stronger under situations where the effect is expected to be more salient..

Keywords: Industry contagion, Recovery rate, Loan pricing, Debt recovery channel

JEL Classification: G30, G33.

European Financial Management, VOL 26:3, June 2020

Forecasting Recoveries in Debt Collection: Debt Collectors and Information Production

Johannes Kriebel and Kevin Yam

Recent theoretical work suggests that debt collection agencies play an important role in gathering and processing debt or information. We study a comprehensive data set with information provided by original creditors and information gathered in third-party debt collection. In line with the theoretical results, the initial information is sparse and the gathered information is essential for better-informed predictions.

Keywords: Loss given default, recovery rate, debt collection.

JEL Classification: G21, G22, G29, G3

Ownership Ties, Conflict of Interest, and the Tone of News

Emanuele Bajo, Marco Bigelli, Carlo Raimondo

This paper investigates the tone newspapers use in reporting information on a company that is linked with through an ownership tie. Our empirical setting is Italy, a country characterized by dominant national industrial groups’ high ownership of newspapers. Based on a sample of about 123,000 articles, we document that newspapers’ coverage of firms in conflict of interest is greater, with significantly fewer negative and uncertain words. We also document that the slant increases with ownership stakes and decreases with the newspaper’s reputation.

Keywords: Media; ownership structure; conflict of interest.

JEL Classification: G32; L26

Idiosyncratic Momentum and the Cross-Section of Stock Returns: New Evidence

Qi Lin

In this paper, we evaluate the profitability and economic source of the predictive power of the idiosyncratic momentum effect, by using five popular factor models to construct idiosyncratic momentum. We show that all five idiosyncratic momentum strategies produce similar return predictability and consistently outperform the conventional momentum strategy in the cross-sectional pricing of equity portfolios and individual stocks. This positive effect of idiosyncratic momentum on returns is consistent with the investment capital asset pricing model (CAPM). Further analysis reveals that the firm-level idiosyncratic momentum effect cannot extend to the aggregate stock market.

Keywords:Idiosyncratic momentum, Asset pricing, The investment CAPM, Market return predictability

JEL Classification:

G11, G12, G17

Credit Risk, Owner Liability and Bank Loan Maturities During the Global Financial Crisis

Fabio Dias Duarte, Ana Paula Matias Gama and Mohamed Azzim Gulamhussen

We relate credit risk and owners’ personal guarantees to bank loan maturities during the global financial crisis. The findings, which remain robust to reverse causality, show that firms rated as low risk, with a strong relationship with the bank, whose owners provided personal guarantees and with large loan sizes obtained longer maturities. Banks with larger nonperforming loans provided loans with shorter maturities. Firms with low and high risk ratings that provided owners’ personal guarantees obtained longer maturities. These findings shed additional light on the relationship between risk and loan maturities and the role of personal guarantees in reducing information asymmetries.

Keywords: : Small firm financing; Financial crisis; Government policy and regulation; Banks

JEL Classification: D82; G01; G18; G20

Do Bankers on the Board Reduce Crash Risk?

Min Jung Kang, Y. Han (Andy) Kim and Qunfeng Liao

Commercial banker-directors (CBDs) bring both financial expertise in risk management and conflicts of interest between shareholders and debtholders. The burgeoning literature on stock price crash risk generates important questions of whether CBDs reduce crash risk. Using BoardEx data from 1999 to 2009, we find supporting evidence that the firms with CBDs experience lower stock price crash risk. Moreover, the reduction of crash risk is more pronounced for high-risk firms under the monitoring of affiliated banker-directors (ABDs). The results of this study are robust to the Heckman selection model, propensity score matching, and alternative measures of crash risk.

Keywords: banker-directors, crash risk, agency cost, corporate governance, firm risk

JEL Classification: G14, G30, M40

Does Market Power Discipline CEO Power? An Agency Perspective

Anutchanat Jaroenjitrkam, Chia-Feng (Jeffrey) Yu, and Ralf Zurbruegg.

We examine how product market competition (PMC) shapes CEO power. Using various measures to capture both PMC and CEO power, our analyses, which includes a quasi-natural experiment, finds evidence that CEOs have less power when the product market is more competitive. Furthermore, the impact of PMC on CEO power is more pronounced for firms where management are entrenched, where there is lower CEO ownership and lower analyst coverage, and for firms experiencing good “luck” (windfall performance). Our results suggest that market power can act as a substitute for corporate governance in disciplining CEO power, particularly when prone to agency problems.

Keywords: CEO power, market competition, corporate governance, luck

JEL Classification: D22, G34, M52

Social Media Bots and Stock Markets

Rui Fan, Oleksandr Talavera, and Vu Tran

This study examines the link between information spread by social media bots and stock trading. Based on a large sample of tweets mentioning 55 companies in the FTSE 100 composites, we find significant relations between bot tweets and stock returns, volatility, and trading volume at both daily and intraday levels. These results are also confirmed by an event study of stock response following abnormal increases in tweets volume. The findings are robust to various specifications including controlling for traditional news channel, alternative measures of volatility, information flows in pre-trading hours, and different measures of sentiment.

Keywords: Social media bots, investor sentiment, noise traders, text classification, computational linguistics

JEL Classification: G12, G14, L86

Consumption, Asset Wealth, Equity Premium, Term Spread and Flight to Quality

Mauro Costantini and Ricardo Sousa

We link transitory deviations of consumption from its equilibrium relationship with aggregate wealth and labor income and: i) equity returns; and two characteristics of bond investors, ii) the premium demanded to hold long-term assets; and iii) the “flight to quality” behavior. Using a panel of 10 euro area countries over the period 1984Q1-2017Q4, we show that a rise in the consumption-wealth ratio predicts both higher equity returns and the future term spread, while a fall in the consumption-wealth ratio explains a large fraction of the rise in the spread between the “risky” and the “safe-haven” bond.

Keywords: consumption, asset wealth, labor income, term premium, flight to quality, panel data

JEL Classification: C33, E21, E44, D12.

Does Individualistic Culture Impact Operational Risk?

Zhe (Andrew) An, Zhe Cao, Zhian Chen and Donghui Li

Employing a sample of 2957 operational-risk events across 31 countries from 1990 to 2011, we find that financial institutions located in countries with higher individualism tend to have higher operational risk. This positive relation is achieved through the risk-taking channel and the earnings-management channel. In addition, the magnitude of operational losses is higher in more individualistic countries. The results suggest that individualism serves as an important informal institutional determinant of operational risk in an international context. Endogeneity tests and various robustness checks confirm our findings.

Keywords: Operational Risk, Individualism, National Culture

JEL Classification: G20, G32, G15

European Financial Management, VOL 26:4, September 2020

Banks’ Home-Bias in Government Bonds Holdings. Will Banks in Low-Rated Countries Invest in European Safe Bonds (ESBies)?

Jean Dermine

This paper offers two new explanations for banks’ home bias in government bond holdings: a sovereign-based rating cap on corporates and the existence of a ‘bank tax’. These are complementary to the four explanations offered in the literature: risk shifting, gambling for resurrection, moral suasion, and a means to store liquidity for financing future investment. Collectively, they cast doubt on the European Union’s demand-led approach to investment in European safe bonds (ESBies) by banks in low-rated countries. Bank regulations such as constraints on large exposure or risk-based capital on credit risk concentration will be needed if the objective is to break the so-called “deadly embrace”.

Keywords: European banking, Bank regulation, Basel capital, Banks’ home-bias.

JEL Classification: F34, G21, G28

Trust, Regulation, and Contracting Institutions

Brandon N. Cline John “Nutie” and Edie Dowdle

This paper demonstrates that trust directly influences contracting efficiency. We document that trust reduces demand for contract regulation and positively relates to a high-quality contracting environment, supporting a substitution hypothesis. Furthermore, contract regulation no longer leads to poor contracting outcomes. These findings suggest that lack of trust significantly explains inefficient contracting institutions. Based on interaction effects, we note that trust could complement formal enforcement in countries with weak regulation. As regulation increases, trust substitutes for contract regulation. Overall, trust positively promotes efficient contracting by reducing burdensome regulation and providing an alternative to formal contract enforcement.

Keywords: Contract enforcement, efficiency, trust, regulation

JEL Classification: F2; O17; K2

Managerial Incentives for Attracting Attention

María Gutiérrez, Nino Papiashvilia, Josep A. Tribó Gine

This paper studies the mechanisms which motivate managers to engage in cheap talk and attract market’s attention in a credible way. We consider stock splits announcements, voluntary earnings forecasts and press releases issued by firms to the media as proxies for managerial cheap talk. We show that: (i) managerial performance-related pay contracts incentivize executives to attract attention; (ii) analysts increase their coverage of firms following cheap talk; (iii) chief executive officers are punished for attracting attention when market prices do not increase following cheap talk. The results are stronger for firms which are most in need for attention.

Keywords: Voluntary Disclosures, Attracting Attention, Cheap Talk, CEO Compensation, Managerial Incentives.

JEL Classification: G30, G32, G34

Why Do Stock Repurchases Change Over Time?

Yuan-Teng Hsu*, Chia-Wei Huang**

Recent studies have shown the time trends of firm stock repurchase behavior. We examine these time changes for stock repurchase through the lens of real activities earnings management. Managers appear more likely to manipulate earnings through stock repurchases since the passage of the Sarbanes–Oxley Act (SOX) in 2002. Furthermore, suspect firms that just missed analyst earnings per share forecasts have higher incentives to manipulate earnings through stock repurchases. The results are not driven by changes in corporate governance associated with the passage of SOX. Overall, our results suggest earnings management can be a significant determinant of the dynamics of stock repurchases.

Keywords: Stock repurchase, earnings management, Sarbanes–Oxley Act

JEL Classification: G18; G31; G35; G38

Keeping it Real or Keeping it Simple? Ownership Concentration Measures Compared

Taylan Mavruk,Conny Overland,Stefan Sjogren.

We analyze the distributional properties of ownership concentration measures and find that measures come from different underlying statistical distributions. Consistent with theory, some measures that are classified to represent a monitoring dimension have a positive influence on firm performance; other measures that are interpreted to represent a shareholder conflict dimension are negatively related to firm performance. However, other measures deviate from this pattern, and therefore, we cannot conclude that simple measures can replace complicated measures. Some measures are more suitable for analyzing the relationship between management and owners, whereas other measures are more suitable for analyzing the relationships among owners.

Keywords: Ownership concentration measures, distributional properties, monitoring dimension, shareholder conflict dimension.

JEL Classification: C18, C46, C81, D74, G34, L25

Investment and asset securitization with an option-for-guarantee swap

Zhaojun Yang

This paper addresses the investment and financing decisions of entrepreneurs entering into option for-guarantee swaps(OGSs). OGSs significantly increase investment option value. Entrepreneurs initially accelerate their investments and then postpone them as funding gaps grow. Guarantee costs increase with project risks when the funding gap is sufficiently small or large, but the opposite holds true otherwise. Investments are postponed when project risks, effective tax rates, or bankruptcy costs increase. Surprisingly, the higher the project risk, the more the entrepreneur will borrow, with a much higher leverage than predicted by classic models. Entrepreneurs can use OGSs to securitize their assets.

Keywords: Credit default swap, real options, capital structure, asset securitization.

JEL Classification: G12, G23

Differences in CEO compensation under large and small institutional ownership

Onur Kemal Tosun

I examine the influence of large and small institutional investors on different components of chief executive officer (CEO) compensation, using U.S. data for 2006–2015. An increase in large institutional ownership reduces total pay and current incentive compensation (i.e. options, stocks, bonus pay), whereas small institutional investors lower long-term incentive pay (i.e. pension, deferred pay, stock incentive pay). These findings are consistent with managerial agency theory and the substitution of incentive pay by institutional monitoring. The effects are stronger for higher ownership levels and firms with weak governance, less financial distress, long-tenured CEOs, multiple segments, and more free cash flow.

Keywords: Large institutional ownership, small institutional ownership, short-term incentive pay, long term incentive pay, CEO compensation.

JEL Classification: C33, C36, G32, J33, M12

Innovations in Financing: The Impact of Anchor Investors in Indian IPOs

Arnab Bhattacharya, Binay Bhushan Chakrabarti, Chinmoy Ghosh, Milena Petrova

In 2009, the Securities Exchange Board of India allowed qualified institutional investors to anchor initial public offerings (IPOs) by participating in the issue at a price and allocation publicly disclosed preceding the issue. We study anchor investor (AI) in Indian IPOs during 2009–2017. We find the share allotment and the number of AIs separately have significant impacts on valuation and underpricing; however, the net effect is non-significant. Further, AIs significantly influence other institutional investors’ participation in the IPO, and induce lower aftermarket volatility. Overall, our evidence suggests that AIs boost demand for and mitigate ex-ante information uncertainty of IPOs.

Keywords: IPOs, anchor investors, certification, information uncertainty

JEL Classification: G14, G24

Estimating Portfolio Risk for Tail Risk Protection Strategies

David Happersberger, Harald Lohre, Ingmar Nolte

We forecast portfolio risk for managing dynamic tail risk protection strategies, based on extreme value theory, expectile regression, Copula-GARCH and dynamic GAS models. Utilizing a loss function that overcomes the lack of elicitability for Expected Shortfall, we propose a novel Expected Shortfall (and Value-at-Risk) forecast combination approach, which dominates simple and sophisticated standalone models as well as a simple average combination approach in modelling the tail of the portfolio return distribution. While the associated dynamic risk targeting or portfolio insurance strategies provide effective downside protection, the latter strategies suffer less from inferior risk forecasts given the defensive portfolio insurance mechanics.

Keywords: Tail Risk Protection, CPPI, DPPI, Risk Modelling, Value-at-Risk, Expected Shortfall, Forecast Combination, Return Synchronization.

JEL Classification: C13, C14, C22, C53, G11.

Bank Credit Constraints for Women-Led SMEs: Self-Restraint or Lender Bias?

Emma Galli, Danilo V. Mascia, Stefania P.S. Rossi

We test the existence of possible gender biases affecting the firm behaviour in demanding and obtaining bank credit using a cross-country sample of European SMEs. We show consistent evidence that female-led firms are more likely than their male counterparts to refrain from applying for loans. When they apply, apparently female-led enterprises do not seem to face gender discrimination from the lender. Interestingly, however, signs of gender bias appear to arise during the upside phase of the economy. Overall, our study provides support for policy actions aimed at reducing the frictions faced by women-led SMEs when accessing credit markets.

Keywords: Access to finance, Bank lending, SMEs, self-restraint, gender discrimination

JEL Classification: D22, G21, G32, J16.

European Financial Management, VOL 26:5, November 2020

Do foreign stocks substitute for international diversification?

Vicente J. Bermejo, José M. Campa, Rodolfo G. Campos, Mohammed Zakriya

Using a novel sample of foreign securities available for trade in 42 countries during the last four decades (1979-2018), we examine the rise in importance of foreign stocks for investors in their host countries and its implications for diversification across industries and countries. The availability of foreign stocks allows domestic investors to increase their international diversification from home by investing in these stocks. We conclude that including foreign stocks in portfolio investments offers an effective substitute for international diversification, and significantly contributes towards increasing the integration of global markets.

Keywords: International diversification; country/industry effects; foreign stocks; international capital markets

JEL Classification: G11; G15; F36

A bibliometric analysis of European Financial Managementʼs first 25 years

H. Kent Baker, Satish Kumar, Nitesh Pandey

This bibliometric analysis recognizes European Financial Management’s 25th anniversary. EFM’s output and impact have grown considerably since 1994. Although EFM focuses on financial issues in Europe, US authors are now its most frequent contributors. Evidence suggests greater gender diversity and collaboration among EFM authors over time. Most EFM publications focus on stock market and investor behavior, portfolio performance, risk and risk management, firm ownership and corporate governance, banking, and organizational performance. We also identify key attributes associated with EFM’s citations such as article and title length, reference count, and lead female author.

Keywords: financial management, Europe, bibliometrics, negative binomial regression.

JEL Classification: G0; G10

Economies or diseconomies of scope in the EU banking industry?

Elena Beccalli, Ludovico Rossi

Banks’ business models are assumed to affect efficiency, as documented in the banking supervisory priorities of the European Union (EU) for 2016–2018 and the 2014 structural reform proposal for the EU banking sector. We investigate evidence of economies and diseconomies of scope for EU. We find cost economies of scope and revenue diseconomies of scope, resulting in profit diseconomies of scope. Separating commercial from investment activities generates economic inefficiencies on costs but efficiencies on revenues and profits. Economies of scope are affected by bank size, liquidity, competition in the banking industry, and the European sovereign debt crisis

Keywords: Economies of scope; economies of scale; bank business model; stochastic frontier analysis; European banking industry; banking regulation

JEL Classification:

Forecasting the volatility of Bitcoin: The importance of jumps and structural breaks

Dehua Shen, Andrew Urquhart, Pengfei Wang

This paper studies the volatility of Bitcoin and determines the importance of jumps and structural breaks in forecasting volatility. We show the importance of the decomposition of realized variance in the in‐sample regressions using 18 competing heterogeneous autoregressive (HAR) models. In the out‐of‐sample setting, we find that the HARQ‐F‐J model is the superior model, indicating the importance of the temporal variation and squared jump components at different time horizons. We also show that HAR models with structural breaks outperform models without structural breaks across all forecasting horizons. Our results are robust to an alternative jump estimator and estimation method.


JEL Classification:

CEO influence on the board of directors: Evidence from corporate spinoffs

Duong T. Pham

We utilize a sample of spinoff firms that need to form a new board of directors, to shed light on the chief executive officer (CEO) influence hypothesis. We find spinoff boards with a CEO who was the parent firm CEO to be similarly structured to the boards of industry and size‐matched peers, whereas spinoff boards with nonparent CEOs are structured for greater monitoring. Consistent with our board structure results, the CEO compensation and replacement decisions of parent CEO spinoff boards are more lenient toward spinoff CEOs, whereas those of nonparent CEO spinoff boards are more consistent with protecting shareholder benefits.


JEL Classification:

Market discipline on bank bond issues through the lens of a new forward‐looking measure of loan quality

Giorgia Simion, Elisa Cavezzali, Siva Nathan, Ugo Rigoni

Using unsecured bond spreads over the 2007 to mid‐2014 period, we test investors’ ability to price bank loan risk. We use a new measure of loan risk that incorporates forward‐looking information embedded in ratings assigned by external rating agencies to bank loan portfolios. Only Italian banks are required to systematically disclose this specific information. We find that investors do price forward‐looking information inherent in bank loan portfolios. This finding reflects the increase in risk perception following the sovereign debt crisis, which had the strongest effects on peripheral countries, with tensions in the lending market. Overall, these results suggest that our new forward‐looking measure provides an additional channel through which market discipline can operate.


JEL Classification:

Betas versus characteristics: A practical perspective

Gregory Nazaire, Maria Pacurar, Oumar Sy

We apply a new dummy‐variable method to examine which factor exposures (betas) and characteristics provide independent information for US stock returns in the context of the multifactor models of Hou, Xue, and Zhang and of Fama and French. We find that betas related to market, size, value, momentum, investment, and profitability factors are not priced. In contrast, firm characteristics related to size, value, investment, and profitability have significant and independent explanatory power, suggesting that they are important in determining expected returns. Finally, the cross‐sectional effect of momentum is subsumed when the return on equity is factored in.


JEL Classification:

Portfolio optimization in the catastrophe space

Carolyn W. Chang, Jack S. K. Chang, Min‐Teh Yu, Yang Zhao

In today's global catastrophe space, the role of insurance‐linked securities has evolved from that of a threatened reinsurance substitute to now being a viable complementary reinsurance product, underpinning the convergence of the two markets. This study constructs a two‐agent sequential optimization framework to mimic the economics of the reinsurance/insurance markets and shows how NPV‐maximizing reinsurers and hedging cost‐minimizing insurers can optimally allocate default‐risky catastrophe reinsurance and default‐free catastrophe bonds at the interface of these two markets. We analyze parametric impacts considering interest rate risk, financial leverage, basis risk, differential markup, catastrophe arrival intensity, and severity, as well as other relevant characteristics.


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Regulatory stress testing and bank performance

Lukas Ahnert, Pascal Vogt, Volker Vonhoff, Florian Weigert

This paper investigates the impact of stress testing results on banks’ equity and CDS performance using a large sample of 12 tests from the US CCAR and the European EBA regimes in the time period from 2010 to 2018. Passing banks experience positive abnormal equity returns and tighter CDS spreads, while failing banks show strong drops in equity prices and widening CDS spreads. We also document strong market reactions at the announcement date of the stress tests. We complement existing studies by investigating the predictability of stress test outcomes and evaluating strategic options for affected banks and investors.


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